Tax Court affirms proposed assessments for lack of evidence

A lack of sufficient evidence doomed a businessman’s appeal of the Indiana Department of State Revenue’s proposed assessments against two of his businesses, as the Indiana Tax Court ruled Thursday it could not substantiate the businesses’ various expense deductions based on the evidence presented.

Beginning in 2003, Paul Elmer established two pharmaceutical companies, Pharmakon Long Term Care Pharmacy, Inc. and Hamilton Consulting Group. Pharmakon was the primary pharmacy for 41 long-term care facilities, while Hamilton coordinated the provision of respiratory care services to Pharmakon’s customers.

Some of the facilities Pharmakon served were operated by affiliates of Magnolia Health Systems, Inc., which was owned by Stuart Reed. Elmer and Reed also worked together through Hamilton, with Reed’s business, Augusta Corporation, providing licensed respiratory therapists and necessary medical supplies, while Hamilton coordinated the provision of the respiratory care services on behalf of Pharmakon. During the 2005 through 2007 tax years, Pharmakon was Hamilton’s only customer, with Hamilton, in turn, paying Augusta for its “consulting” services. 

Elmer and Reed never formalized their business relationship with a written contract except when mandated by the law. Thus, when many of the Magnolia affiliates failed to pay their invoices in 2007, the companies ended their relationship.

After an audit of Pharmakon and Hamilton for the 2005 through 2008 tax years, the Indiana Department of State Revenue disallowed some of Elmer’s expense deductions and instead issued proposed assessments totaling more than $400,000 in additional adjusted gross income tax, interest and penalties. After their departmental appeal was denied, Elmer and his wife appealed to the Indiana Tax Court, which upheld the proposed assessments on Thursday.

In the Thursday opinion, Senior Judge Thomas G. Fisher first wrote the Elmers failed to establish Pharmakon’s eligibility for contract labor deductions by failing to provide sufficient detail about Hamilton’s coordination efforts for Pharmakon. Similarly, Hamilton’s entitlement to expense deductions for consulting services could not be established because the testimony Elmer and Reed offered about those services were “nothing more than unsubstantiated conclusions,” Fisher said.

“Additionally, when Mr. Reed was asked about the specifics of the agreements, particularly those regarding respiratory therapy services, he could not recall the details and deferred to his previously-completed affidavits,” the judge wrote. “The affidavits, however, do not provide any further details about the terms of any of the agreements.”

Hamilton also sought miscellaneous expense deductions based on evidence from “general ledgers,” but those ledgers were never admitted into evidence, Fisher said. The evidence was similarly insufficient to prove Pharmakon was entitled to uncollectible debt deductions based on billing mistakes, he said, because the company did not indicate what collections measures it used to collect from private pay patients.

Finally, the court ruled that the Elmers failed to substantiate their uncollectible debt deductions as they related to the Magnolia affiliates by failing to “offer documentary evidence or some other evidence that detailed the summarized amounts of the purportedly uncollectible debt.”

The case is Paul J. Elmer and Carol A.N. Elmer v. Indiana Department of State Revenue, 49T10-1110-TA-00064.